Monday, February 13, 2012

Game Theory Class #5 Highlights

In this class, we studied the timing principle. In games where there is no private information about payoffs, a player moving first can always do at least as well as going at the same time. Moreover, in many situations, moving first can improve payoffs. The reason secrecy doesn't pay is that the only possible secret is your strategy. In equilibrium, individuals are engaging in mind reading, so even this is no longer a secret. When there are no real secrets, there is nothing to be gained by keeping moves hidden. Transparency, on the other hand, can shape the rival's strategic response. This option value is potentially useful. As we saw in the McCain-Schumer experiment, it was quite useful for the first mover. 

We also observed that the right first move depended on the competitive position of the first mover relative to the second mover. When an aggressive move from the first-mover provokes a retreat by the second, then being aggressive is optimal. On the other hand, when aggression is met with aggression (as in the case when the first mover has lower value than the second), then the right strategy is to ratchet down competition. This is referred to as the favorite and underdog effects, respectively. 

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